Walk into any bank in Nepal for a home or auto loan and you will be offered two numbers. One is lower and "floating". The other is higher and "fixed". The lower one is not automatically the better deal. This guide explains what each one actually means, how banks decide the gap between them, and a simple way to choose.
What a floating rate is
A floating rate is the bank's base rate plus a premium. The base rate is recalculated by every bank each month under Nepal Rastra Bank's directive, and most banks pass the change to your loan at a quarterly reset, usually at the start of Kartik, Magh, Baishakh and Shrawan. The premium is fixed in your loan agreement; the base rate is not.
So if you sign at a base rate of 6.5% with a 2.5% premium, you start at 9%. If the base rate climbs to 8% two years later, your rate becomes 10.5% and your EMI is recalculated. If it falls to 5.5%, you pay 8%.
What a fixed rate is
A fixed rate does not move with the base rate. In Nepal it is rarely fixed for the whole tenure. Most banks fix for three to five years, after which the loan converts to floating at whatever base rate plus premium applies then. Read the sanction letter for the exact fixed period and the conversion rule.
NRB requires banks to offer a fixed-rate option on home loans, which is why you now see both numbers on every rate sheet.
How banks price the fixed premium
Banks do not guess the fixed number. They start from the floating rate and add a fixed-rate buffer, typically 1 to 2 percentage points, to cover three things:
- Funding risk. The bank's deposits reprice every few months, but your loan will not. If deposit rates rise, the bank absorbs the loss.
- Prepayment risk. When rates fall, fixed-rate borrowers refinance. The bank prices in that it will lose its best customers at the worst time.
- Liquidity cycles. Nepal swings between excess liquidity and tight liquidity roughly every two to three years. Banks set the buffer higher when they expect the tight phase.
That is why in a low-rate year you might see floating at 9% and fixed at 10.5%, and in a high-rate year floating at 12% and fixed at 12.5%. The gap tells you what the bank expects rates to do.
The maths on a real loan
Take a Rs 50 lakh home loan over 20 years.
| Rate | Monthly EMI | Difference vs 9% |
|---|---|---|
| 9% floating (today) | Rs 44,986 | – |
| 10% floating (after one reset up) | Rs 48,251 | +Rs 3,265 |
| 10.5% fixed | Rs 49,919 | +Rs 4,933 |
The fixed loan costs about Rs 4,933 more every month, or Rs 59,000 a year, as insurance against the base rate rising. If base rates go up by 1.5 points within the fixed period and stay there, the fixed borrower comes out ahead. If rates stay flat or fall, the floating borrower saves close to Rs 3 lakh over five years.
When floating wins
- Base rates are at or near a cyclical high and the trend is down. Nepal's base rates have historically fallen for a year or two after each liquidity crunch.
- You plan to prepay aggressively. Floating loans usually carry a lower prepayment charge, and every rupee you prepay shortens your exposure to rate changes.
- Your income has room. If a Rs 3,000 to 5,000 jump in EMI would not break your budget, you do not need to pay for insurance against it.
When fixed wins
- Base rates are low by historical standards and liquidity is loose. That is exactly when the fixed buffer is cheapest and the risk of a rise is highest.
- Your EMI is already close to 50% of income. A rate rise could push you into default, and a fixed rate removes that risk for the fixed period.
- You value a predictable number for the next few years more than the chance of saving a little.
A quick decision rule
Look at the gap between the two rates on our comparison page. If fixed is less than 1 point above floating, fixed is cheap insurance and worth serious thought. If the gap is 2 points or more, the bank is charging heavily for certainty and floating is usually better, provided your budget can absorb a rise.
Whichever you choose, set a rate alert for your bank so you know the day the base rate moves, and use the base rate impact calculator to see what a 1-point change would do to your EMI before you sign.